Sunday, July 19, 2015
Bank ponders a rate rise as job market changes gear
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Things are getting rather interesting. In the past few days we have had what looks like a concerted attempt by the Bank of England to prepare people for an interest rate rise in the coming months, coupled with an equally explicit effort by Janet Yellen, chairwoman of the Federal Reserve Board, to say America’s rates will also soon be rising.

Mark Carney, the Bank of England governor, travelled up to Lincoln to tell the world that the decision on interest rates would move into sharper focus around the turn of the year, which most people interpreted as signalling the first rate rise since 2007 and the first move in any direction since 2009.

And yet, on the face of it, the numbers have been going against the idea of a rate rise, certainly in Britain. Inflation, having popped up to a heady 0.1% in May, subsided to zero in June. “Core” inflation dipped slightly and British Gas has announced the start of what might be a new round of energy price reductions with a 5% cut in gas prices. Though inflation will rise as we get towards the end of the year, it is not about to race away.

Even more tellingly, the latest job market figures were a lot softer - at least as far as employment and unemployment were concerned – than expected. Could the Bank, having held off from raising rates when jobs were booming possibly do so when employment is slipping and unemployment going up?

The answer is that it depends, and it depends on two things: whether the latest figures were a temporary blip and whether, if they were not, they signal a change of direction we should celebrate, or be worried about.

The headlines from the job figures were that the number of people in employment fell by 67,000 to 30.98m in the March-May period, which was the first quarterly fall since February-April 2013. That, to remind you, was when the air was thick with worries – misplaced as it turned out – that Britain was sliding into a triple-dip recession. As we now know, there was not even a double-dip.

The fall in employment coincided, perhaps unsurprisingly, with a small rise in unemployment, up 15,000 in the March-May period, with the unemployment rate ticking up from 5.5% to 5.6%. This was the first quarterly increase in unemployment since early 2013.

Was it a blip? The quarterly falls in unemployment have been getting smaller in recent months, even as employment growth was continuing quite strongly. That would suggest that the obvious blip factor, uncertainty over the general election, was not entirely to blame. The fact that the claimant count, a narrower measure of unemployment, edged higher in June, supports that verdict. So election uncertainty may have played some part in the unemployment rise but it is far from the full story.

What is also happening, very clearly, is that as the economic recovery matures, so the job market is evolving. In the latest three months there was a 45,000 increase in employees working full-time, alongside a 40,000 drop in part-time employees and a 55,000 fall in the number of self-employed.

We should be wary of reading too much into quarterly changes like these but they are part of a longer-run trend. So over the past 12 months there has been a hefty 382,000 rise in the number of full-time employees, while the rise in the number of part-time employees has slowed to a crawl, up just 46,000 in a year. The number of self-employed people, meanwhile, dropped by 131,000.

So we are seeing a shift from self-employment into employment and from part-time into full-time work. As I noted recently, some people who opted for self-employment as a stop-gap are moving pack into working for somebody else as opportunities become available. Though you would not want this to run alongside rising unemployment and falling employment, it is a healthy development.

The other part of the non-blip story is what is happening to wages and, it appears, productivity. Average earnings growth has been accelerating for some time. Last summer, total pay was up by less than 1% on an annual basis. Now it is rising by 3.2%, with private sector pay in the latest three months up 3.8% on a year earlier. That will settle down a little in the coming months but we appear to have moved back into a world in which private sector pay – the best guide to underlying labour market pressures – rises by 3% or more.

A quick verdict on the latest numbers might be that the old relationship between wages and unemployment, the Phillips curve, is reasserting itself; as wages go up, employment goes down. I am not sure that is the correct verdict because, alongside the uptick in wages – and thanks to zero inflation real wages are now growing very rapidly indeed – there has been an upturn in productivity.

We will not know the official productivity figures for some time, but looking at what we do know in terms of hours worked, it looks like output per hour was up about 0.8% in the second quarter and by at least 2% on a year earlier. That is starting to look like more like normal productivity growth, which is another healthy development.

It will be healthier still, of course, if rising productivity can be combined with rising employment and falling unemployment, albeit with both occurring at a slower pace than we have become accustomed to in the past 2-3 years. So, instead of strong employment growth alongside weak productivity and stagnant or falling real wages, employment rises more modestly but real wages and productivity also increase. That would be a more normal state of affairs.

It would also be consistent with a gradual “normalisation” of monetary policy. David Miles, who is nearing the end of his six years on the Bank’s monetary policy committee (MPC), was if anything more interesting than Carney. He has yet to be part of a vote to change interest rates in either direction. But even he, known to be one of the most “dovish” MPC members said last week that waiting too long to raise rates would be “a bad mistake” and that “the time to start normalisation is soon”. That is unlikely to mean before he leaves the MPC at the end of August but, if the Bank’s reading of the labour market squares with mine, it may not be many months after that.